Saturday, March 21, 2009

The AIG Bonus Tax: Constitutional?

In full damage-control mode, the U.S. House of Representatives on March 19 to much fanfare rushed through a bill to tax those notorious and controversial AIG bonuses. This legislation, which would impose a 90% tax rate on bonuses paid after Dec. 31, 2008, by any company (not just AIG) that received more than $5 billion in government bailout money, is meant to correct an error or omission by the in the so-called stimulus bill--a massive piece of spending legislation that was also rushed through both chambers by the Democrats without the American people, let alone the lawmakers themselves, having a chance to read it. Apparently Sen. Christopher Dodd (D-CT) or his staff egged on by the Obama administration inserted 1lth-hour language in the stimulus bill that permitted these taxpayer-funded bonuses.

Some legal observers maintain that the House-imposed tax levy violates Article 1, Section 9, of the Constitution (which rules out "bills of attainder or ex post facto laws), while others disagree based on the premise that the courts generally defer to Congress on tax matters.

So what is a bill of attainder anyway? In his outstanding book The Supreme Court, the late Chief Justice William Rehnquist wrote that in a 5-4 decision, the high court struck down--in Ex Parte Garland and Ex Parte Cummings--certain post-Civil War loyalty oaths on grounds they were unconstitutional bills of attainder and ex post facto laws.

The Constitution prohibited both the state and the national governments from enacting either of these things, so the question before the Court was whether the act of Congress or the Missouri statute came within the definition of the prohibited acts. These clauses of the Constitution are not of the broad, general nature of the Due Process Cause but refer to rather precise legal terms that had a meaning under English law at the time the Constitution was adopted. A bill of attainder was a legislative act that singled out one or more persons and imposed punishment on them without the benefit of trial. Such actions were regarded as odious by the framers of the Constitution because it was the traditional role of a court, judging an individual case, to impose punishment. An ex post facto law was a law that punished for conduct that had occurred before its enactment. An early case from the Court, Calder v. Bull, had rather strongly intimated that this provision only applied to criminal laws.

Senate approval is required before the tax measure can become the law of the land. Some senators oppose the bill in its current form on constitutional or other grounds. There is also the issue of freedom of contract; that is, the law generally honors contracts freely entered into by private parties.

Even if the Senate and House ultimately agree on a measure, legal challenges are likely. And who knows how many additional loopholes will work their way into the final bill.

We're not losing sleep by any means over these corrupt Wall Street firms or their fat-cat executives (although we are losing sleep over the remnants of our 401(k)). There is no justification for making the taxpayer pick up the tab for these outrageous bonuses, which amounted to an incredible $165 million in AIG's case. However, leaving aside the constitutionality for a moment, the idea that the government could target the income of certain narrow groups of people sets an unsettling precedent, doesn't it?